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FTC at 100: Michael Pertschuk’s turbulent years as FTC chairman

Published on January 15, 2015 in Issue 865

Editor’s Note: The Federal Trade Commission is celebrating its 100th anniversary this year; the first official meeting of the commission was held in March 1915. In this series of articles, we are chronicling highlights in the agency’s history.

When President Jimmy Carter nominated Michael Pertschuk to be chairman of the Federal Trade Commission in 1977, it seemed like a perfect fit. After all, Pertschuk had been a powerful player on Capitol Hill in advancing consumer protection issues, and he was even called the 101st Senator, as he skillfully navigated the Upper Chamber from his perch as chief counsel and staff director of the Commerce, Science and Transportation Committee.

Pertschuk knew the FTC well, having played a central role in the drafting of the landmark Magnuson Moss Warranty Act of 1975, which had enlarged the FTC’s powers to establish industry-wide rules and to get civil penalties when those rules were violated. No longer would the agency have to rely solely on case-by-case adjudication.

Having been a Senate staffer for more than a dozen years, and having worked on a range of high-profile issues, from boosting consumer rights on warranties to requiring warning labels on cigarettes and getting the National Highway Traffic Safety Administration up and running, the affable Pertschuk had established close ties to many lawmakers, including his mentor, powerful Washington Democratic Senator Warren Magnuson, chairman of the Commerce Committee. So after he took the oath of office on April 21, 1977, Pertschuk was well-positioned to advance an ambitious agenda with the blessing of his many friends on Capitol Hill.

As Pertschuk took his seat at the agency, the FTC was in the process of recreating itself as a powerful force after years of virtual irrelevancy when its passivity and failure to use its broad powers to protect consumers had been well-documented. A joke about the agency in the 1960s was that there are three museums on Pennsylvania Avenue: the National Archives, the National Gallery and the FTC Building. Consumer activist Ralph Nader’s report pilloried the agency for its close ties to business interests and its complacency and aimlessness — conclusions that were affirmed by an American Bar Association study requested by President Richard Nixon.

But when Pertschuk arrived, the agency already had undergone a dramatic about-face engineered by four Republican chairmen: Caspar Weinberger, Miles Kirkpatrick, Lewis Engman and Calvin Collier. They had reorganized the FTC and replaced complacent and indolent staffers with a highly motivated contingent of lawyers and economists determined to advance the agency’s consumer protection and antitrust mandates.

As former FTC Chairman Robert Pitofsky bluntly put it in his oral history, “the dead wood” had been removed and replaced with some of the best and brightest young staffers eager to make their mark. No more three-hour lunches and no more looking the other way when companies ran afoul of the law and were not even required to sign a consent decree.

The FTC had all but shaken off its derisive moniker as “the little old lady of Pennsylvania Avenue” and was well on its way to becoming one of the muscular agencies of that era.

Indeed, as he settled into his new post, Pertschuk, who was 44, found an agency that already had commenced at least 48 industry-wide investigations. That spurt of activity had the support of Congress, which also had shifted into overdrive with passage of social and regulatory legislation that had come on the heels of the civil rights movement.

Lawmakers had passed more than 25 consumer, environmental and other regulatory measures from 1967 to 1973, and had topped it off by amending the FTC Act in 1973 to give the agency heightened enforcement powers. In 1975, the Energy Policy and Conservation Act empowered the commission to require appliance manufacturers to disclose the energy efficiency of their products. In 1976, the Hart-Scott-Rodino Antitrust Improvement Act gave the FTC and the Justice Department new powers to block mergers that were found to be anticompetitive and to require companies that were seeking to merge to provide advance notice of their intentions.

A few months before Pertschuk arrived, the agency’s aggressiveness also was evident in its willingness to take on some of the so-called “learned professions.” The commission was fast becoming the bкte noire of the medical profession. At the beginning of 1977 — before Pertschuk’s confirmation — FTC:WATCH reported that the agency had already subpoenaed records from at least 41 medical specialty associations — and possibly as many as 80 — to determine whether they were limiting competition and should be targeted for antitrust action.

“The FTC is rapidly becoming the bane of organized medicine,” FTC:WATCH reported on January 28, 1977, shortly before Pertschuk was nominated for the chairmanship of the agency.

In 1975 and 1976, with Republican Gerald Ford in the White House, the FTC had also commenced no fewer than 16 separate rulemakings — taking aim at a range of practices and industries, many of which had never before been subject to Washington regulation.

An extraordinary gamut of proposed rules was advanced in 1975, including: the Vocational Schools Rule; the Food Advertising Rule; the Prescription Drug Rule; the Mobile Home Rule; the Hearing Aid Rule; the Health Spa Rule; the Funeral Practices Rule; the Cellular Plastics Rule; and the Protein Supplements Rule.

The rulemaking activities in 1976 included the Used Car Rule, which requires car dealers to display a window sticker or Buyers Guide on used cars for sale, including warranties; the Eyeglasses Rule, which requires an end to restrictions on price advertising of eyeglasses and contact lenses; the Antacid Rule, which would have required over-the-counter antacids to include warnings on labels approved by the Food and Drug Administration; and amendments to the 1971 Care Labeling Rule, which requires manufacturers and importers to attach care instructions to garments. Even as the other rules in 1976 eventually were implemented, the Antacid Rule was dropped in 1981.

It was a heady time for hard-chargers at the agency, as shown by all those regulatory initiatives. But as Pertschuk took office, the new chairman did a few things that were very unusual in Washington even in the 1970s. He made public appearances wearing turtleneck sweaters instead of the dark-gray suits that are the uniform of the antitrust industry, which alienated some of the more rock-ribbed conservatives. He also made clear that he was not taking this post as a launching pad to a lucrative future perch in a big law firm. He vowed never to practice law before the commission after he completed his term. That pledge, of course, made the private bar very nervous but it initially gave Pertschuk great freedom.

He could make waves, act boldly and didn't have to worry about offending would-be future employers. As FTC:WATCH reported at the time, Pertschuk was probably one of the least affluent chairmen in modern times and “he is not determined to make money. He is determined to make change.”

Pertschuk took advantage of the progressive zeitgeist to further the agency’s newly-invigorated sense of mission. His activist bent was obvious right out of the gate when he vowed to make the commission “the best public interest law firm in the country.” Such rhetoric was welcome on Capitol Hill, where liberal Democratic Massachusetts Senator Edward M. Kennedy was taking the reins of the Senate Judiciary Antitrust and Monopolies Subcommittee.

The new managerial staff continued to work on all those rulemakings and also pursued investigations and litigation, much of which had begun before they arrived, that focused on such areas as alleged anticompetitive practices of several powerful, large corporations, including in the oil industry.

By 1978, though many of the proposed industry-wide rules that Pertschuk had inherited had been cut back or dropped, a number of them directed at businesses ranging from used cars to funeral sales were close to being finalized.

Though much of this rulemaking had been launched by Republican chairmen and had been years in the making, the fact that they were finalized under Pertschuk made him appear to a growing chorus of critics to be a super activist. They saw him as determined to impose bureaucrats’ heavy hand on an array of businesses that had previously had minimal contact with Washington.

A political backlash began. Businesses, especially those with a presence in every community, such as doctors, dentists, used car dealers and funeral directors, had lots of clout with their lawmakers. They were not about to simply roll over and accept what they saw as the dictates of a bunch of Washington bureaucrats.

Take the funeral rule. It was designed to give consumers the right to choose only the goods and services they needed or wanted and to pay only for those that they select. The rule also required consumers to be given price lists so that they could compare costs of services among funeral homes.

Former FTC Chairman Robert Pitofsky, who also served as a commissioner from 1978 until 1981, recalled in his oral history that “funeral directors and their allies in Congress just came after us with hatchets. They asked for hearings. They held up enforcement of the rule, I’d say for almost 15 or 20 years.”

Unfortunately, Pertschuk had “inherited the idea that rulemaking was a better idea than case-by-case enforcement because that way you can wrap up the whole industry in one proceeding,” Pitofsky said. But that approach came at a cost because it engendered the opposition of the entire industry — such as in the case of the funeral directors.

The FTC's aggressiveness increasingly galvanized the business community and its powerful lobbying efforts took aim at the agency’s “overreach.” Members of Congress were hearing irate reports from their constituents, including big contributors to their campaigns. The recurring complaint was that the FTC was a cancer on the economy, its burdensome regulations hurt business and productivity, and its aggressive staff was on something akin to a witch-hunt.

Former FTC Chairman Timothy J. Muris told FTC:WATCH in an interview that the slew of rules “had put the FTC in the position of taking on funeral directors, used car salesmen, mobile homes, and vocational schools — all kinds of people. Politically, these rules were raising issues. More important, substantively, from my standpoint, these rules were problematic. The Washington Post had written that the FTC had become the second most powerful legislature in Washington. … Even if you thought the rules made sense — and I didn’t — that can’t be a sensible role for five unelected bureaucrats.”

Bill Baer, who was then serving as the FTC’s assistant general counsel for legislation, agreed that the rulemakings had serious adverse political consequences. In a 1988 article in the Journal of Public Policy and Marketing, Baer acknowledged “excesses” in some rules, including the Used Car Rule, because initially it would have required dealers but not private sellers to inspect used cars before sale. He said the agency had failed to give much thought to the cost of inspections or to “as is” sales. Baer also singled out the hearing aid rule, which he wrote, had “onerous recordkeeping requirements” and other restrictions that were not of clear value to consumers.

Baer concluded that while many of the rules were re-tooled, many should not have been proposed at all. “This initial tendency to overregulate a problem,” he wrote, coupled with the commission’s seeming insensitivity to the burden of complying with the rules, made the agency an easy target because businesses could deflect attention from their own anti-consumer behavior and turn their public anger to the commission—and lawmakers were sympathetic to their complaints.

Pertschuk acknowledged in his book Revolt Against Revolution that the FTC staff’s tenacity was beginning to be seen as over-the-top. “The fear and anger generated by these [rulemaking] initiatives were compounded by the uncommon competence, determination and aggressiveness of the FTC staff—too often seen, however unjustly, as zealotry and inquisition,” he wrote. “The animosity was also fueled by the sometimes self-righteous independence of the Commission from traditional avenues of influence: the Washington Bar, the White House and Congress.”

That fury at the commission was bluntly expressed by advertising executive David McCall in the November 14, 1977 issue of Advertising Age magazine, when he said that the FTC’s new young aides “make the Baader-Meinhof gang look like a bunch of fun-lovers” — comparing the officials to an organization of Communist thugs in West Germany that had been linked to dozens of assassinations.

So how did Pertschuk’s fortunes change so fast? It was a combination of his hard-charging style and the promulgation of some of the sweeping rules begun by his Republican predecessors, as well as a few controversial new ones. That latter category included the widely-scorned, proposed “kidvid” rule in 1978 that would have banned certain television advertisements that encouraged kids to eat sugary foods. That proposed rule was dropped in 1981.

Add to that a rapidly changing conservative political dynamic sweeping the country — a shift that Pertschuk was slow to recognize and to adapt to, as even some Democrats on Capitol Hill began to attack him.

At the same time, the economy began to tank with inflation skyrocketing, interest rates jumping, unemployment exploding, and, by 1979, a hostage crisis in Iran making daily headlines. This toxic combination produced an anti-government fervor, including “a revolt against regulation” that began to take hold, as Pertschuk, himself, later described in his book of that title.

Pertschuk, however, was not in tune with the shifting sentiments in the country and he continued to believe that the government’s role was to help solve economic and social problems. One particular speech was a case in point, and was cited for years to come by his opponents. In late 1977, Pertschuk addressed the New England Antitrust Conference. “Although efficiency is important, it should not dictate competition policy,” he said. “Policymakers must sometimes choose between greater efficiency — which may carry the promise of lower prices — and other social objectives, such as the dispersal of power, which may result in marginally higher prices. Economic analysis can clarify the trade-off, but it cannot be allowed to dictate the outcome.”

Antitrust enforcers should not be single-minded in a “narrow allocative efficiency approach,” the chairman added. Instead, a responsive policy should consider “social and environmental harms … [including] resource depletion, energy waste, environmental contamination, worker alienation [and] the psychological and social consequences of market-stimulating demands.”

That speech “went through many drafts—it was his first major speech—and virtually everybody in the upper ranks of the Bureau of Competition participated in a draft,” recalled Bert Foer, who served in various posts in the Bureau of Competition in these years. “We gave it to Mike and he took it to the beach and made changes in it that didn’t come back through the bureaucracy. When he gave the speech, it contained a number of statements that were, let’s say, unnecessarily provocative.”

“I think the rhetoric sometimes got out of control,” Foer added.

Pertschuk’s thesis drew a scathing review from Ernest Gellhorn, dean and professor of law at the University of Washington Law School, who wrote in Regulation magazine in May/June 1978 that “in less than two hours he managed, singlehandedly, to reset the antitrust clock and to push it in a direction of a ‘Brave New World.’ ” Calling Pertschuk’s view of antitrust unwise and based on unsound interpretations of the law, Gellhorn wrote that “unless antitrust law has an objective and principled foundation, antitrust enforcement can become the personal plaything of enforcement personnel or the stock in trade of lobbyists and influence-peddlers.”

Pertschuk’s take also sharply departed from the emerging antitrust philosophy embodied in the so-called Chicago School, as articulated by various academics, including Robert Bork, who had served as US solicitor general in the Nixon and Ford administrations. That school viewed enhancing economic efficiency as the goal of antitrust. Bork said that the consequence of relying on non-economic factors “can only be uninformed, ad hoc, political guesswork, not anything remotely recognizable as law.”

Meanwhile, the FTC frequently lacked a full contingent of commissioners during these years. Commissioner Calvin J. Collier, who had served as chairman from 1976 until Pertschuk arrived in 1977, stepped down. That left a four-member commission, with two Democrats — Pertschuk and Paul Rand Dixon — and a Republican, David J. Clanton, and Elizabeth Dole, who was an independent although married to Senator Robert Dole, the Kansas Republican who ran for vice president in 1976 on the GOP ticket with Ford. She joined the GOP in 1975, and left the agency in 1979 when her husband ran for president. Pitofsky joined the commission in 1978.

But the issue that did the most to precipitate Pertschuk’s fall was his earnest desire to restrict television ads aimed at young children to reduce the amount of sugar they consume.

The rule was proposed, and strongly championed by Pertschuk, after three public interest groups — Action for Children’s Television, the Center for Science in the Public Interest and Consumers Union — had petitioned the commission to address what they saw as a growing health problem for children. The commissioner of the Food and Drug Administration had weighed in out of concern that dental health was at risk because of consumption of heavily-advertised sugary products.

Pertschuk had set the stage for the rule with a November 1977 speech about how children respond differently to advertising than adults because of the way they process information. He said that children can’t distinguish a sales pitch from advice from adults. He said that sugary foods create health problems, such as tooth decay and obesity, and lead to long-term negative consequences.

Pertschuk had felt a sense of urgency on the issue because children were becoming a particular target of modern advertising techniques, and sugary cereals were a lucrative market. Products that were heavily advertised and then sold in vast amounts to U.S. children included Count Chocula, Frankenberry, Lucky Charms, Fruity Pebbles and Cookie Crisp cereals. Reports were starting to circulate that children were already getting fatter than in previous generations.

Pertschuk strategized over how the agency might fast-track the rule to get it on the books by circumventing the usual procedures. He even hoped to find a way to forbid cross-examination of witnesses and limit the hearings to two places where he was likely to find a friendly audience, San Francisco and Washington.

Ultimately, the text of the commission’s proposed kidvid rule in 1978 reflected Pertschuk’s concerns. The public was asked to comment on a three-part proposal, including banning all TV ads seen by audiences with a significant proportion of children too young to understand the real purpose of such advertising. The rule also would ban TV ads promoting sugary food most likely to cause tooth decay if directed to or seen by audiences with a significant proportion of older children. Finally, it would require that TV ads for other sugary food not included in the ban but that would be seen by audiences with a significant proportion of older children be balanced by separate nutritional or health ads funded by the advertisers.

The agency was inundated with more than 60,000 pages of comments from a range of groups and individuals, but the verdict was in as soon as The Washington Post condemned it in an editorial on March 1, 1978. “It is a preposterous intervention that would turn the agency into a great national nanny,” the Post editorial scolded — a withering takedown that would reverberate for years. “[T]he proposal, in reality, is designed to protect children from the weakness of their parents — and parents from the wailing insistence of their children. That, traditionally, is one of the roles of a governess — if you can afford one. It is not a proper role of government.”

Not mentioned in the Post editorial, however, was the likely financial consequence to the newspaper and TV industry if they were to lose an important source of revenue in ads targeted to children. And the FTC’s proposed rule certainly demonstrated little concern for the practical reality that ads were an important source of funding for broadcasts and news operations.

Pertschuk was stung. He later wrote in his book that the Post’s use of ridicule without even addressing serious First Amendment questions about such an ad ban was “devastating — a sign to the broadcast, grocery manufacturing and advertising industries that the Federal Trade Commission’s proceeding was fair political game — and to any congressmen tempted legislatively to abort the proceeding, a sign that the political risks would be minimal.”

Pertschuk also acknowledged that he had miscalculated by judging that most prudent lawmakers “would long hesitate before enlisting on the perceived side of 'junk food' advertisers against the health and well-being of the American child and family.”

The “national nanny” sobriquet is repeated even today by agency critics and is used to try to rein in its efforts. That editorial was a “watershed for the FTC because you had what’s regarded as a bastion of liberalism, The Washington Post, criticizing the Federal Trade Commission from the right,” Muris noted.

The FTC has “never recovered” from that episode because it “triggers a kind of political flashback that often paralyzes, neutralizes, weakens — select your verb — Commission action,” Jeff Chester, executive director of the Center for Digital Democracy, a consumer and privacy advocacy group, said in an interview. “It is a constant presence in the lives and the decision-making at the commission.”

Pertschuk, Muris said, fell out of favor because of three problems—his provocative rhetoric in speeches early in his tenure, all of the initiatives that his Republican predecessors had begun but came to fruition on his watch and the kidvid rule.

As the debate over the rule became very heated, Pertschuk was hammered in new ways that questioned his credibility. After delivering a talk to the Grocery Manufacturers of America, a person identified by FTC:WATCH at the time as a “prominent Washington attorney” wrote the FTC chairman questioning the authenticity of letters from children that he had read aloud. The attorney demanded photocopies of the letters to be able to prove to himself they had been written by children.

The first formal slap-down occurred on May 2, 1978, when the House appropriations subcommittee with jurisdiction over the FTC’s budget refused to give the agency the money to fund the rulemaking. A proposed rule on nutrition advertising also received no funding. These developments came as a shock to agency officials, who had failed to recognize the growing friction on Capitol Hill.

Industry, led by General Mills, the maker of Count Chocula and Lucky Charms cereal, sought to get Pertschuk disqualified from any role in overseeing the children’s advertising rulemaking, saying that he had an agenda in enacting a rule and had ceased to view the matter objectively. If the FTC chairman refused to step down voluntarily, the company said, he should be forced from participation by his fellow commissioners.

While that move seemed a stretch at the time, the fact that it was even being attempted should have indicated how weak Pertschuk had become. After all, no company would typically want to become such an obvious vocal opponent of a powerful agency’s chairman. But General Mills had no compunction about going after this chairman, who was rapidly losing support on Capitol Hill.

Other evidence that the FTC was losing clout came in September 1978, when AC Nielsen Co. and Arbitron declined to give the agency data to study the extent of advertising to children, saying it was confidential information, owned by the firms, and should not be publicly disseminated.

The American Newspaper Publishers Association also showed disrespect to the commission by refusing to participate in a panel on media concentration because its officers said they believed the FTC would not conduct the event fairly.

FTC:WATCH reported that agency officials pretended not to notice the rising tide of animosity, asserting that it was the usual government-business tension. But what was happening was, in fact, far more telling than the typical Washington battles.

“The fact is, as we have noted over and over, the business community is coming to view the FTC not as an adversary within the commonly-accepted sense of the term, but as a kangaroo court before which only a fool would expect a fair hearing and a just result. And that development is damned unhealthy,” FTC:WATCH reported at the time.

Then it turned out that General Mills’ audacious ploy succeeded. In November 1978, U.S. District Court Judge Gerhard Gesell disqualified Pertschuk from further participation in rulemaking on children’s television advertising, saying that the FTC chairman had “prejudged” the facts and could not rule objectively on it. The judge found that Pertschuk’s “emotional use of derogatory terms and characterizations,” as well as his “affirmative efforts to propagate his settled views” made his involvement improper.

An appellate court reversed Gesell, giving Pertschuk permission to participate, but by this point the FTC chairman decided he had no choice but to step aside.

“I am concerned that the continuing controversy regarding my participation could become the focus of the debate instead of the far more important issue — whether the proceeding itself should be allowed to continue,” he said. “This is a painful decision, perhaps the most difficult decision I will make as a member of the FTC. However, I believe the public interest is better served if I remove any issue of my personal participation from the legislative debate.”

So when the hearings into kidvid began in February 1979, only two FTC commissioners were sitting on the case — Paul Rand Dixon and David Clayton — as Elizabeth Dole had just stepped down to help with Bob Dole’s presidential campaign. Pitofsky had disqualified himself because of a conflict of interest stemming from his involvement with a public interest law firm that had intervened in the case.

Meanwhile, Pertschuk’s chairmanship was increasingly beset by serious attacks from lawmakers. The chairman who once was warmly welcomed in the corridors of Capitol Hill had become a pariah. Democratic Senator Ernest Hollings, a senior member of the Commerce Committee and a lawmaker famous for his sometimes acerbic wit, had told his staff that after spending the August 1979 recess with his South Carolina constituents, he had learned something interesting. The two top concerns they had about public policy were inflation and, a close second, the excesses of the FTC.

“It’s a good thing they passed the anti-lynch laws before you got appointed,” Hollings, in his characteristically colorful but blunt style, told Pertschuk. “You’re like the cross-eyed javelin thrower; you never hit anything, but you sure keep a lot of folks on the edge of their seats.”

But the problems for the FTC on Capitol Hill went far beyond such rhetorical needling. The agency had to fight to protect its funding, as lawmakers were so tired of the relentless complaints from back home that some tried to address them by putting the agency out of business.

“You have managed to alienate the leading citizens of every town and city in Kentucky,” Senator Wendell Ford, a Kentucky Democrat, told Pertschuk, and then proceeded to enumerate all of the chairman’s critics. “Lawyers, doctors, dentists, optometrists, funeral directors, real estate brokers, life insurance companies and salesmen, new and used car dealers, bankers, loan companies and other credit suppliers, Coca-Cola bottlers….”

The tone of the debate over the FTC’s continued funding was getting downright nasty. For example, Senator Lowell Weicker, a Connecticut Republican, viewed more as a maverick than a bomb-thrower, unloaded on the agency from his perch on the Appropriations Committee. “I think this preoccupation with what children hear … is a waste of taxpayers’ money. … I’m not going to have a bunch of idiots going around trying to discover the sugar content of cereal.”

By late 1979, relations on Capitol Hill had deteriorated so much that the agency was fighting for its life. In November, a House bill included various amendments to end some of the FTC’s ongoing investigations and proposals, including those dealing with the funeral industry, used cars, hearing aids and mobile homes. The bill also empowered either chamber of Congress to veto the FTC’s proposed rulemakings aimed at regulating an entire industry. A number of Democrats jumped on board, including Democrat Elliot Levitas of Georgia, who said “it sends a signal to the bureaucracy and to the American people that the trend to more government and less control by the people has ended.”

The national mood had shifted precipitously. People began wondering whether the FTC could survive. With even many Democrats allied against the agency, its days seemed numbered. As the new decade dawned, the FTC's very existence was hanging in the balance. And the election of 1980, which would sweep Republican Ronald Reagan into the presidency and bring even more agency opponents into positions of power, was only months ahead.

Kirk Victor